2017 Preview: A new red star over China – Part 2: China and the world

2017 Preview: A new red star over China – Part 2: China and the world

This is the second of a two-part analysis by a GRI Analyst working for the British government on what is in store for China in 2017. It explores China’s Catch-22 — the fact it is integrating itself further into the global economy and becoming a ‘responsible stakeholder’ in multilateral institutions, while concurrently showing signs of reliving the experience of the Ming Dynasty in turning inwards and becoming isolationist.

Although Chinese foreign policy has for a long-time been shaped by domestic developments, in the coming year more than ever, China’s diplomatic endeavours will be directly correlated to internal trends. Any change to the shape of its international agenda will be in reaction to developments of the uncertainty surrounding the recent events in the U.S and Europe.

China abroad in 2017

Abroad, 2016 was a particularly significant year for the Asian juggernaut. The Communist Party was handed an unprecedented legal ruling against them at the International Criminal Court, China ratified an important climate change agreement in Paris, Beijing agreed to sanction long-standing ally North Korea on Pyongyang’s illicit missile tests, and the country humiliatingly managed to secure only third place in the Rio Olympics.

On top of a wealth of domestic hurdles Xi has to jump, there are a number of important international relationships China needs to manage, each seemingly more precarious than the last. Here’s how China’s relations with the outside world are likely to shape up over the coming 12 months.

U.S-China uncertainty

Sino-US relations will be, for the most part, the most unpredictable bilateral relationship on the planet after President-elect Donald Trump is sworn into the White House. However, the Xi-Trump relationship will not be where the focus will be.

Beyond the sagacious wisdom of Trump’s twitter account, there are four individuals who will play a vital role from the U.S side in Sino-American relations next year. The first two sit on the same side of the fence: Peter Navarro, proposed head of the newly formed ‘National Trade Council’ and Michael Flynn, tipped National Security Adviser, both of whom are staunch China critics and want to get tough on trade. These choices will; however, be offset by a third player, the Governor of Iowa Terry Branstad, who Trump has chosen as U.S Ambassador to China – himself a strong free trade proponent and who Xi has referred to as a “long-time friend.”

The final spotlight will be on Trump’s nomination for Secretary of State, Rex Tillerson, a supporter of greater international engagement and global free trade as well as holder of the Order of Friendship by President Putin in 2013. Consequently, China’s importance and treatment will be fought over between these four players and their President, particularly in regards to trade and multilateralism.

After Brexit and Trump, China is now effectively the guardian of the trade status quo. Despite this the incoming American administration sees things very differently and Trump himself has spoken about imposing a 45% tariff on Chinese goods in the U.S. This could spark a trade war as there would be no hesitation on the part of the Chinese to retaliate, with the possibility of a 60% tariff on U.S goods a possibility. As a number of analysts have contended, the U.S would lose this war with China and as such the President-elect would be wise not to pursue this path.

Consequently, the U.S-China relationship will effectively be a game of trade brinksmanship. It will be characterised by interest-only engagement, and values-based diplomacy will take a backseat. Trump’s desire to flex his muscles, without a thought-through strategy could, however, prove costly.

The elephant in the room here will be Taiwan. Trump’s recent remarks regarding the Republic of China have undoubtedly worried cadres in Beijing and this could cause headaches for policy-makers in Taipei as they try to appease the mainland. The inauguration of the pro-independence Democratic Progressive Party in the spring of 2016 saw a freeze in cross-strait relations and despite a less inhibited administration in Washington, Taiwan will be keen to maintain the more than 30% of its trade currently going to China and will certainly been shaken by the events in Hong Kong. The U.S will likely continue its ‘One China Policy’, given the increasingly loud voices of China experts in the U.S, and China will continue on a trajectory very similar to the one it took in 2016.

Trump won’t stop an enhanced China-Russia partnership

Despite Trump’s choice of Exxon chief Tillerson and his own relationship with Putin, Sino-Russian relationships have become much closer in recent years with the signing of new agreements and the resolution of a number of border disputes.

There have been a number of events which signal that Sino-Russian relations are reaching their own ‘golden era’. President Putin for one has described Russia’s relations with China as more than just a strategic partnership, stating that “relations between our countries have gone far beyond the one [Presidents] Boris Yeltsin and Jiang Zemin agreed on 20 years ago.” Furthermore, after the yuan was introduced by the IMF as a reserve currency, Putin congratulated Russia’s “Chinese friends.” Finally, Xi has enlisted Russian support in orchestrating military exercises in the South China Sea.

Cooperation between Beijing and Moscow has also been evident in bilateral ties in multilateral institutions towards the end of 2016. At the Hangzhou G20 Summit in September and at the SCO Summit held in Kyrgyzstan in November, proposals from both China and Russia were respectively supported by the other, especially in regard to free trade, investment protection, the provision of state guarantees on project financing, economic interests, and national protectionist measures. These events follow the 2014 Strategic Partnership agreement calling for a new stage in comprehensive cooperation, widely regarded as the most comprehensive economic, political, and security relationship of all of China’s and Russia’s respective strategic partnership networks.

It is expected that Russia will test the Trump administration early into its term, on the back of declarations by Putin stating that “[Russia is] stronger now than any potential aggressor.” The U.S will be unable to sit idly by whereas China’s policy of non-intervention will enable them to maintain close bilateral relations. Russia has been somewhat empowered by the actions of both the U.S and China of late; an early strain in the Russia-U.S relationship will seemingly only serve to benefit the Sino-Russian relationship.

China and a fragmented Europe

China’s relationship with Europe will also be a significant talking point in 2017. For one, the EU and China together form the second-largest economic relationship on the planet, and much of the attention in 2017 will still be on the EU granting China Market Economy Status. Despite this, as Jyrki Katainen, Vice President of the European Commission stated, the “EU-China economic relationship is overall very positive,” but a “comprehensive and balanced” EU-China agreement on investment is needed to allow both sides to invest in each other with more “confidence.” This confidence is key to enhancing mutual understanding and unlocking the full potential of EU-China relations. However, Sino-EU ties will have to contest with the UK trying to fight for its own trade deal, which could also complicate Brexit negotiations.

With elections in Germany, France and the Netherlands among others due to take place next year, China will remain a keen observer of political trends in Europe. These will matter because roughly 20% of Chinese exports go to Europe. Beijing will also be paying close attention to the populist rise in Europe and monitor countries likely to take an anti-other/anti-China stance if far-right parties are sworn into power. This is particularly important for Beijing as existing anti-China actors have largely used the EU’s trade deficit with China to accuse the Asian power of unfair trade tactics.

Despite this, Beijing has been quite clever in appeasing anti-China sentiments originating within Europe. It recently initiated the ‘16+1’ platform which groups together China and 16 countries across Central and Eastern Europe, with deals requiring cooperation with a third party in the bloc to ease concerns from other counties.

The only notable change in bilateral relations will be on how agreements are signed. Due to the fact that this is at the political level where the Sino-EU relationship tends to break down, people-to-people dialogues, smaller agreements and cultural exchanges are likely to increase. These will be carried out order to act as effective vehicles to bring both parties into direct contact with each other to encourage frank dialogue and discussion on the back of which both hope to foster better relations and larger trade and investment deals.

China-ASEAN in 2017

Moving into China’s backyard, China-ASEAN relations will largely depend on Trump fulfilling his promise to abandon the Trans-Pacific Partnership (TPP) when he takes office. If he does, China will no doubt fill the space with its own trade deal. This was clear at the Asia-Pacific Economic Cooperation (APEC) Summit in Peru last month where Xi pledged Chinese backing for a Free Trade Area (FTA) of the Asia-Pacific and the Regional Comprehensive Economic Partnership (RCEP), which excludes the U.S.

However, even if Trump u-turns on his promise, there are still a number of underlying factors which point to greater China-ASEAN relations. Specifically, regarding China’s relations with members of ASEAN, as Kuik Cheng Chwee from Malaysian National University argues, “Southeast Asian countries already embraced China’s economic initiatives and geopolitical influence even before Trump’s victory, primarily out of domestic-driven pragmatism.” Having reaped the economic benefit of engagement with China, a number of Southeast Asian nations have also become increasingly populist and anti-American in their own rhetoric.

This has been most pronounced with the President of the Philippines Rodrigo Duterte, who has been vocal of his willingness to “reorient” the Philippines towards China and Russia following the ICC ruling in favour of the Philippines in the South China Sea, in a dramatic 180 on Manila’s long-standing pro-U.S policy.

Following the announcement of closer ties between China and the Philippines, Malaysia’s Prime Minister Najib Razak also affirmed closer security ties with China. Continuing former Prime Minister Mahathir Mohamad’s anti-Washington stance, U.S-Malaysia relations are set to deteriorate further as Kuala Lumpur moves closer to Beijing.

Elsewhere in Southeast Asia, nations are almost queuing up to befriend China. Laos openly declared its close affiliation with China in early 2016 due to their desire to attract Chinese infrastructure investment; Cambodia’s Prime Minister Hun Sen described China as his country’s “closest friend” in October and has been keen to secure large-scale loans from China. Similarly, Thailand’s military government has moved towards authoritarianism and fostered stronger ties with China, especially in relation to arms deals; and even Singapore and Indonesia – ASEAN’s wealthiest economies – have also both been increasingly engaged with China, something only set to increase as a result of a very protectionist Trump President.

Two Southeast Asian nations who are not jumping for joy at the prospect of the U.S pivoting back home are Myanmar and Vietnam. However, due to the relative size and geographic location of the former and Hanoi’s agenda heavily geared towards its economic, political and military relations with Russia, Beijing is likely not to be too worried. In short, China-ASEAN relations are only set to strengthen.

China, India, Pakistan & OBOR in 2017

Finally, one key global development to watch in 2017 will be the One Belt, One Road (OBOR) initiative and China’s relations with its Western and Central Asian neighbours. The Chinese government has budgeted more than a $1 trillion for the project through state financial institutions and in most countries in the Central Asian neighbourhood including Bangladesh, Sri Lanka and Nepal, China has won over their political elites with promises of financial gain.

However, another giant sleeps close to Beijing: India. In the aforementioned areas, an interesting China-India dynamic manifests itself. China’s reach increasingly finds itself in India’s backyard and if it does not continue to maintain strong growth levels with funds for projects in these countries, India could step in. It is thus largely in China’s best interest not to let relations with New Delhi deteriorate.

At the same time, India is also unlikely to push China too hard given closer ties between China and Pakistan. The main reason for this cooperation is that Beijing realises Pakistan forms a vital part of its OBOR initiative. In a nod to Islamabad, China has blocked India’s entry into the Nuclear Suppliers Group and vetoed Pakistan-based terrorist Masood Azhar from appearing on the UN list of terror. Consequently, this complicated trilateral relationship sees both India-China and India-Pakistan relations unlikely to drastically change in the first half of the next year.

Dealing with Xi’s China in 2017

China will be keen to follow former President Deng Xiaoping’s famous dictum “coolly observe, calmly deal with things, hold your position, hide your capacities, bide your time, accomplish things where possible” throughout 2017 as it deals with its internal issues and sets its agenda for the next five years in November at the 19th Party Congress.

The Chinese are long-term strategists are although they realise the benefit of a quick fix here and there, the dreams of Xi and the mandarins in Zhongnanhai – the central headquarters of the CCP and State Council – go beyond that of the next five, ten, even fifty years. 2017 will be a year in which China will be keen to avoid antagonism and confrontation of any sort, a wish which may be difficult achieve due to an increasingly populist Western landscape rife with anti-China sentiment.

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